Smart Climate Policy and the Green Economy
By Eric R. Blume, Editor and Publisher, Electric Perspectives Magazine
This is an exciting time to be in the electricity business. It’s at the center of so many issues that are top of mind for the country—the economy, energy and the environment all find electric companies playing a lead role.
This is, after all, the industry that underpins economic growth in an increasingly electronic world. It’s the industry that is driving progress in technologies that are making the economy greener and more efficient, creating jobs in the energy sector and outside it, and giving customers new ways to manage their use of electricity. These technologies include the Smart Grid, plug-in hybrid electric vehicles, renewables, advanced coal and nuclear and more.
The industry is also a positive voice in one of the most significant issues of our time—global climate change—and is a strong supporter of smart climate change legislation.
The economy, technology and solutions to climate change depend on one another. In these areas, electric utilities are leading a transformation to a greener economy, greener jobs, clean and efficient technologies, and an exciting electric future.
Michael G. Morris
Chairman, President and CEO
American Electric Company
As the owner of the largest electricity transmission system in the U.S., AEP takes very seriously its responsibility to lead the expansion and development of America’s electric energy backbone. Toward that end, AEP is investing hundreds of millions of dollars and partnering with other utilities in the development of a more robust interstate network to promote electricity grid reliability and support economic growth. We believe, as do our partners, that development of a “transmission superhighway” is critical to our nation’s growth and security.
Based in Columbus, Ohio, AEP is one of the largest electric utilities in the U.S., delivering electricity to more than 5 million customers in 11 states. AEP ranks among the nation’s largest generators of electricity, owning nearly 38,000 megawatts of generating capacity in the U.S. AEP also owns the nation’s largest electricity transmission system, a nearly 39,000-mile network that includes more 765-kilovolt extra-high voltage transmission lines than all other U.S. transmission systems combined.
Addressing Climate Change
Making smart climate policy that protects customers and meets climate change goals is vital for our economic and environmental futures. The U.S. Energy Information Administration projects that electricity demand will jump by at least 23% by 2030 as the U.S. population increases, the economy expands, and the use of electric technologies—all those flat-screen TVs, cell phones and computer systems—grows. Meeting that demand will require enormous infrastructure investment. Over the next two years, for example, the industry faces an estimated $170 billion in capital improvement costs.
These expenditures are not discretionary: They involve transmission and distribution investments, without which reliability becomes an issue, in addition to generation and environmental expenditures.
Looking forward, the industry’s infrastructure investment needs could reach $2 trillion during the next 20 years—and those figures include
projected savings from aggressively expanding energy efficiency and demand response programs.
That means we need to develop smart climate policy now. The members of Edison Electric Institute (EEI)—shareholder-owned electric companies—are committed to addressing the challenge of global climate change. In 2007, they announced their support for an 80% reduction in greenhouse gas (GHG) emissions by 2050.
Indeed, EEI’s member companies have been working for more than two years to ensure that climate change legislation protects not only the environment but also the wallets of electricity customers. And electric companies stand ready to work with the U.S. Senate to move forward on smart climate legislation we can all support, according to EEI. (See smartclimatepolicy.org sidebar on page 11.)
Even during the recession, which has lowered demand, electric companies have maintained their access to capital markets and, with attractive dividend yields, remained a safe haven for investors. Analysts continue to believe that many electric companies offer potential for 10%+ earnings growth—supported by rate base growth and rate relief from cases decided in recent months—when the economy emerges from recession.
Protecting the Customer and The Planet
Making dramatic cuts in the nation’s carbon emissions will be expensive under any scenario, especially for low-income families and energy-intensive businesses and industries. No matter what legislative approach Congress takes, it is essential to include effective consumer protection measures that help limit price increases for all consumers and avoid harm to U.S. industry and the economy.
EEI highlights several ways to craft legislation that helps protect electricity customers, U.S. workers and the economy, while maintaining the environmental benefit of putting a price on carbon.
- The allocation, rather than auction, of emissions allowances in a cap-and-trade system would reduce electricity price increases. Under cap-and-trade, a national limit on greenhouse gas emissions is established and, over time, that cap is lowered. To implement the program, the federal government would create credits (known as allowances or permits to release a certain amount of GHGs) for regulated facilities, adding up to the total emissions allowed under the cap.
To help reduce electricity price increases for all consumers, allowances should be allocated—not auctioned—to the power sector. The primary benefit of allowance allocation to your local electric company is that value of the allowances would then flow directly to all electricity customers—residential, commercial and industrial—under strict supervision of the state public utility commission that closely regulates those companies.
Auctioning allowances, on the other hand, would sharply increase costs by requiring companies to pay not only for the allowances, but also
for the cost of actually reducing emissions. To the extent that allowances are allocated, only the costs of actually reducing emissions are passed along to customers.
It makes sense that the initial allocation to the electric power sector be proportionate to its level of CO2 emissions (currently 40%). Electric companies would receive the vast majority of allowances, and the remainder would go to merchant coal generators to help defray compliance costs, mitigate wholesale price increases and maintain a reliable electricity supply in their regions.
- An effective “collar” on the price of allowances would reduce price volatility. This collar should have both a moderate floor and a moderate ceiling to protect consumers and the economy from wildly oscillating prices. The collar would come into play when the market price of allowances either exceeds the maximum level or falls below the minimum. It’s a straightforward approach that would promote cost certainty and protect consumers and the economy from price volatility and possible market manipulation. Once advanced climate technologies are widely available and commercially deployable, the collar could be phased out.
- Legislative targets and timetables that are reasonable and aligned with the availability of climate-friendly technologies reduce costs. Technologies for energy efficiency, the Smart Grid, renewables, advanced nuclear and coal, and electric transportation all will play a role in reducing carbon emissions. Some of these technologies are currently available, albeit at a higher cost than conventional ones. Others, like carbon capture and storage systems for coal-based plants, are the focus of extensive R&D but need further development. The technologies have different time horizons, but all are critical to the dual goals of reducing GHGs and maintaining a reliable, affordable electricity supply. As Congress considers climate change legislation, compliance dates for emissions targets should correspond to the broad availability of these technologies. Keeping technology and timetables in synch will temper the increase in compliance costs and help keep electricity prices in check.
- Flexibility in developing offsets helps reduce cost increases. Offsets are domestic and international programs that reduce, avoid or sequester GHG emissions and thereby “neutralize” a portion of a utility company’s emissions. The offsets generate allowances that help companies meet a percentage of their compliance obligation and reduce price increases for customers. In smart legislation, the types of offsets would be wide ranging, including such “off-system” activities as energy-efficiency programs and forest conservation, and such “on-system” initiatives as efficiency improvements for transmission and distribution lines.
- Look at climate change as a global issue so that we can protect jobs and the economy. Climate change cannot be addressed by the U.S. alone. A smart climate policy should engage developing countries in reducing their GHG emissions. The International Energy Agency predicts that global energy-related CO2 emissions will increase 45% between 2006 and 2030, and that emissions from China, India and the Middle East will account for more than 75% of that increase. In 2008, China surpassed the U.S. as the world’s biggest emitter of CO2 from power generation, according to the Center for Global Development.
In August, Edison Electric Institute rolled out smartclimatepolicy.org as a way to educate utility stakeholders and the public on current legislation—and a way to get them actively involved. Smart climate policy can meet the dual goals of addressing climate change and protecting customers, says EEI: “But it requires a commitment from everyone—including all countries, governments, industries, businesses and consumers.”
To learn about smart climate legislation and its impact on the electric industry, visit www.smartclimatepolicy.org.
The Full Suite: Energy Efficiency
Meeting demand while reducing GHG emissions will require an aggressive and sustained commitment to a full suite of climate-friendly technologies. But those technologies also promise a greener economy and a bright future.
Energy-efficiency programs and technologies are a perfect example. These technologies include the Smart Grid, with advanced meters, infrastructure systems and new communications networks, which will give both the utility and customers information they can act on to save energy and money. The Smart Grid promises a whole spectrum of programs and products to improve the efficiency of homes and businesses.
The President’s economic stimulus package included $4.5 billion in Smart Grid funding, as well as funding for a variety of other efficiency activities. These included energy-efficiency block grants to states; weatherization assistance for low-income homes; more stringent building codes; and rebates on efficient appliances for consumers.
Robust efficiency programs can serve to defer infrastructure investment, which is one way to cushion the customer. Electric utilities are leaders in promoting energy-efficiency programs and services. And these programs are making a difference. For example, electric company demand-side management programs helped to save 929 billion kilowatt hours of electricity between 1989 and 2007. That’s enough electricity to power 83 million homes for one year. This savings is equal to the annual electricity output of 147 baseload power plants (rated at 800 megawatts each and operating at a 90% capacity factor).
To turn efficiency into a business for utilities, the industry is working with state utility regulators to adopt regulatory policies that:
- encourage investments in energy efficiency;
- have the ability to recover energy efficiency costs; and
- provide incentives to promote efficiency that are similar to incentives for building new infrastructure.
David Ratcliffe
Chairman, President and CEO
Southern Company
The U.S. Census Bureau estimates that by the year 2030, 40% of Americans will live in the region that stretches from Texas to Virginia. Many of these new neighbors will look to Southern Company to serve their energy needs.
At Southern Company, we’re poised to meet rising electricity demand by pursuing a balanced approach to energy. We continue to promote energy efficiency by working with our customers to reduce energy use in their homes and businesses. Natural gas, the fuel of choice for electric generation in recent years, remains an important option for us, as does renewable energy, like biomass and wind. We are planning to build new nuclear power — a clean, safe and economical form of generating electricity. We’re also developing new technologies that will allow us to use coal, our nation’s most abundant energy resource, in a cleaner, more efficient manner.
Southern Company is implementing the most effective solutions to keep up with growing energy needs. The nation’s economy, quality of life and ability to compete in the world’s markets will depend on a reliable and affordable energy supply — and one that can meet the commitments of ever-increasing environmental standards.
Renewable Energy
Renewable fuels—wind, solar, geothermal and biomass—help promote fuel diversity, are largely free of CO2 emissions and have low or no fuel costs. Utilities are significantly expanding the renewable share in their generation portfolios. Wind, for example, is the fastest-growing renewable energy source in the nation. Wind farms currently operate in 37 states and have a total generating capacity of 30,381 megawatts.
Electric companies are working to meet renewable portfolio standards that exist in several states. Non-hydro renewable energy sources comprise just 3% of the U.S. electricity fuel mix. To some extent, that is because some regions have more renewable resources than others. Moreover, sources like wind and solar are often far from populated areas. But electric utilities are undertaking several transmission projects—with a current investment of $21 billion, with more to come—that support the integration of renewables into the grid.
Carbon Capture and Storage
The benefit of carbon capture and storage (CCS) systems is their ability to capture, compress, transport and store CO2 emissions from power plants. CCS, used in conjunction with advanced coal technologies that gasify coal or burn it more efficiently, is a key technology that will allow electric companies to use coal as a base load energy resource in a carbon-constrained world. It is likely that natural gas and petroleum facilities also will need to use CCS to meet future carbon restrictions.
The coal and electric utility industries are working with the U.S. Department of Energy and the Electric Power Research Institute to
develop advanced coal technologies through several programs. Substantial new funding is needed to complete the research, development, demonstration and deployment of these technologies.
The success of CCS technology is critical, but CCS systems are not expected to be commercially deployable on a widespread basis until around 2025—a prime example of why targets and timetables for GHG emissions reductions must be in concert with technology development.
Djalma Bastos de Morais
Chief Executive Officer
CEMIG
CEMIG—Companhia Energética de Minas Gerais—manages one of the four largest electric-energy distribution networks in the world with 286,000 miles of lines. In Brazil, where it’s headquartered in the state of Minas Gerais, it supplies electricity to 17 million consumers, making it the largest integrated utility in the country, with nearly 7,000 megawatts of generation capacity.
CEMIG owns and operates 63 power plants, 99% of which are hydroelectric. The company also operates three wind farms. Another three power plants are currently under construction.
The company was founded in 1952 as an economic development holding to support the Minas Gerais state’s modernization and diversification efforts, as well as expand its industrial park. Since then, CEMIG has sustained itself as an efficient and competitive company, and today, has businesses in 19 Brazilian states.
Advanced Nuclear Technologies
Nuclear power provides almost 20% of our nation’s electricity and is the only carbon-free source of base load power currently available. Advanced nuclear technologies promise more-efficient generation, making them an even more important part of the green economy.
Today, 22 companies and consortia are preparing license applications to build and operate as many as 34 new nuclear reactors, or approximately 43,400 megawatts of generating capacity. In addition, power uprates—or increased generation and capacity improvements—at existing nuclear plants will provide additional GHG reductions.
Importantly, electric utilities are also working to preserve their customers’ dividend income. Without legislative action, today’s 15% dividend tax rate, which is in effect for most taxpayers, could jump to more than 39% at the end of next year. The Obama administration has shown support for extending a reduced rate, but its adoption is hardly a foregone conclusion.
More than 24 million households benefit from dividends—and at the higher rate, seniors and those with lower incomes would bear the brunt of an increase. A study completed last year by Ernst & Young showed that 64% of those filing federal tax returns with qualified dividends were taxpayers age 65 or older. The study also found that 68% of those returns were from taxpayers with incomes of less than $75,000, and 42% were from taxpayers with incomes of less than $25,000.
For more information, visit www.defendmydividend.com.
PHEVs
Plug-in hybrid electric vehicles (PHEVs) and electric-only vehicles will help our country enter an era of clean transportation and greater energy independence. PHEVs will rely on the existing electricity system instead of gasoline to recharge car batteries. Battery-powered electric vehicles will produce just one-third of the GHGs emitted by gasoline-fueled vehicles.
PHEVs can save consumers money at the pump, reduce our country’s dependence on foreign oil and lead to an overall reduction in air emissions. Many electric companies now are working with the auto industry to get PHEVs on the road. Battery technology, charging infrastructure and costs remain hurdles to the market.
President Obama’s stimulus package contained $2.8 billion for the development of electric vehicles. In addition, the U.S. Department of Energy recently announced that the funding will be used to promote the manufacturing of advanced-battery and related components, and for transportation electrification demonstration and deployment projects. And car manufacturers are plowing ahead—Toyota will come out with a PHEV next year; Ford, Honda, Lexus and Mercedes will offer new hybrid electric models; and Chevrolet, Chrysler, Mitsubishi and Nissan, among others, will roll out all-battery vehicles.
Thomas R. Kuhn
President
Edison Electric Institute
Shareholder-owned electric utilities are leaders in the debates over economic policy, energy strategy and the environment. For more than two years, EEI’s member companies have been working to ensure that climate change legislation protects the environment and the wallets of electricity customers. And we stand ready to work with the U.S. Senate to move forward on smart climate legislation we can all support.
We believe that emissions credits should be allocated rather than auctioned to help reduce electricity price increases; that there should be an effective “collar” on the price of allowances, with both a moderate floor and a moderate ceiling to protect consumers and the economy from price volatility; and that legislative targets and timetables should be reasonable and aligned with the availability of climate-friendly technologies—the Smart Grid, renewables, advanced coal and nuclear, and plug-in electric vehicles.
For more information on the key issues facing electric companies and the nation, please visit www.eei.org or www.smartclimatepolicy.org.
The Electric Future
A full suite of technologies is necessary to address the challenge of climate change—and they need development, which utilities are pursuing aggressively. But those technologies also promise a new boost for the economy, a new source of American jobs and a transformation in the way that customers, both large and small, use electricity. They will drive an electric future and a green economy.
